BUYING OUT an Ex Partner
The content in this blog is not professional advice, but simply observations made by someone who has experienced a number of separations and then has helped in the process of a buyout.
The process of separation is a difficult one for most couples and can take years sometimes to find a settlement agreement. Most family homes are either sold and the profit shared between the title holders or one party buys the other party out.
There are a number number of steps to consider first before moving forward:
1. LEGAL ADVICE – Where both applicants on a home loan are happy to just sell a property and split the proceeds, it’s still important to seek legal advice. This is because unless there is a legal document that declares all parties are in agreement with the dispersements and both applicants have had legal council, one of the applicants can always claim they were unfairly considered and may return for more at a later date.
When one applicant wants to buy the other out then you definitely need legal council as well as for the administration of title deed changes and a legal and binding agreement by both applicants regarding the dispersement of funds etc.
There are also implications regarding stamp duty payable in the buyout procedure if you engage legal counsel, which could save you a good deal of money.
2. VALUATION – The first thing to do before you contact your broker is to order a valuation from a neutral agency to determine an agreed value. When you advise your broker he/she will also order one on befalf of the lender to determine the loan to value ratio from the lender’s stand point. This does not affect the agreed valuation but may affect Lenders Mortgage Insurance considerations if the debt is too high in the buyout.
3. CALCULATE THE END DEBT – Calculating the end debt borrowing you will need for a buyout can be complicated but the formula is as follows, where (v) = value of your home , (D) = remaining home loan Debt (C) = other costs such as legals and application fees (E) Equity payable in cash to other party.
First work out the equity – (V-D), Divide this in half to give you the amount your Ex-partner requires (E) add legals to this amount +(C) plus (D) remaining home loan debt.
As an example, your home is worth $1,000,000 and the remaining debt is $400,000 then you would work out the equity $1,000,000 – $400,000 = $600,000 /2 = $300,000 for each owner (if a 50/50 title share ). Add this $300,000 plus legals and application fees for new loan of around $2000 plus the remaining debt of $400,000. The total borrowing amount you need = $300,000 +$400,000+2000 = $702,000
Working this backward you can see that now on a house worth $1,000,000 you have retained your $300,000 equity less your legal costs.